Nixon-era presidential advisor David Gergen was at Envestnet’s annual advisor summit when Congress pushed through a long-awaited overhaul of the individual health insurance market.
He called the narrow vote a triumph for Donald Trump and a tragedy for the way the American political process has stopped reaching for lasting win-win outcomes.
We’ll talk more about that over the weekend, but let’s spend a little time today on what the bill on the table means to your clients. Some are probably ready to cheer if the bill goes all the way to the White House for signing. Others aren’t.
Start with the odds
Gergen thinks it’s extremely unlikely that the House bill will make it that far. The Senate probably doesn’t have the votes and the Congressional Budget Office is unlikely to deliver the impact numbers fiscal conservatives need to see.
When the Senate comes back with their bill, it will probably reflect bigger compromises. If that’s too much for the people in the House to tolerate, the negotiations could drag on for months.
In the meantime, the current tax year drags on, taking the benefits of ending Obamacare offer the wealthiest investors and executives with it. Couples earning more than $470,700 were looking for a capital gains tax rollback to 15%, eliminating the 3.8% investment income tax along with it.
For highly compensated workers, that break could boost real investment returns by 11% per year: every $1,000 of passive income in the Obamacare world would turn into $1,110 after repeal.
That’s a healthy bump for anyone at that level with even a little money in the market, and naturally their advisors would see AUM grow at a much faster rate.
On the other hand, only the wealthiest retirees earn that much, so there’s either a job or substantial capital doing the work. At average historical returns, a balanced portfolio might need to be in the $5 million zone to push a client over the 20% capital gain line.
An extra percentage point or two after taxes would pay a lot of healthcare bills, so clients at that level are looking like net winners no matter where medical costs go. The relief will feel good. They’ll probably want to do a little cheering, feel more relaxed — after all, that percentage point covers your fees in itself.
Moving down the food chain
The 3.8% surcharge picks up at $416,700 for married couples, who paid 15% capital gains in the Obamacare era and will go on paying it if the House bill goes through.
Depending on the mix of cash flow coming into the household, clients in this bracket might save as much as $15,800 a year or as little as zero. Again, bringing in that kind of passive income requires either genius management or a portfolio worth at least $4 million, if not both.
At the high end, that rebate probably pays the insurance premiums as well, although the math might get tight for highly compensated self-employed types who needed individual coverage.
Do the calculations for your clients. This is where classifying as much income as possible as derived from the investments can really add up to real money in a post-Obamacare universe, so talk to the accountants to see whether it’s worth talking to the client about fine-tuning the compensation model.
Then there’s the mass affluent client who gets nothing upfront. Maybe they’ll ultimately save money on their health insurance, but for now, let’s hope they have great workplace plans.
Whenever Spectrem talks to these investors — at least $100,000 in liquid assets but not quite hitting millionaire status — medical risk triggers the biggest anxieties. Easily 1 in 4 younger people worry about being able to afford the care they need, and as they age, 1 in 3 pre-retirees gets nervous.
When they retire, Medicare generally limits their healthcare costs to around $3,000 a year, depending on health and level of coverage, of course.
Younger investors may have years to go before they reach that status. If these are your clients, I can tell you right now, a lot of them are nervous.
They’d probably be extremely happy if you could run the various models for coverage inflation to see if their long-term financial plans can handle the strain.
Let them know if they’re covered. There’s a lot of propaganda out there right now and until they see the benefits of yet another big change to the insurance system, all they have is the rumors of a “replace” to follow the “repeal.”
After all, a lot of people managed to afford reasonable individual coverage in previous decades, whether they had a preexisting condition or not. It’s hard to remember that world now and there may ultimately be no going back, but start with historical pricing and go from there.
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